Optimal pricing for carbon dioxide removal under inter-regional leakage

Max Franks, Matthias Kalkuhl and Kai Lessmann

Journal of Environmental Economics and Management, 2023, vol. 117, issue C

Abstract: Carbon dioxide removal (CDR) moves atmospheric carbon to geological or land-based sinks. In a first-best setting, the optimal use of CDR is achieved by a removal subsidy that equals the optimal carbon tax and marginal damages. We derive second-best policy rules for CDR subsidies and carbon taxes when no global carbon price exists but a national government implements a unilateral climate policy. We find that the optimal carbon tax differs from an optimal CDR subsidy because of carbon leakage and a balance of resource trade effect. First, the optimal removal subsidy tends to be larger than the carbon tax because of lower supply-side leakage on fossil resource markets. Second, net carbon exporters exacerbate this wedge to increase producer surplus of their carbon resource producers, implying even larger removal subsidies. Third, net carbon importers may set their removal subsidy even below their carbon tax when marginal environmental damages are small, to appropriate producer surplus from carbon exporters.

Keywords: Carbon dioxide removal; Climate policy; Interregional Leakage (search for similar items in EconPapers)
JEL-codes: F18 H23 Q37 Q5 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Optimal pricing for carbon dioxide removal under inter-regional leakage (2022)
Working Paper: Optimal Pricing for Carbon Dioxide Removal Under Inter-Regional Leakage (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:117:y:2023:i:c:s009506962200122x

DOI: 10.1016/j.jeem.2022.102769

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